Universal’s solution to sagging music sales? Jack up the price

After their price cuts from last year failed to increase CD sales, Universal …

Last August, Vivendi Universal announced a plan to cut both the wholesale and suggested retail price of CDs. Due to complaints from retailers, Universal kept the lower wholesale price, but decided customers didn't need to know the suggest retail price. In theory, these cuts would allow retailers to lower retail prices in an effort to boost sales of Universal CDs. It was also believed that Universal's price cuts would force competing studios to lower their prices, but apparently the move failed on all accounts. Competitors failed to follow through with wholesale price cuts and many stores didn't lower retail CD prices in an effort to recoup the loss of cooperative advertising subsidies. To make things worse, the move did not result in the increased sales Universal hoped for. Now, in a move reminiscent to the recording industry raising prices on music downloads, Universal wants to increase both the wholesale and suggested retail price of CDs.?

The Vivendi Universal unit, home to such acts as Dr. Dre and 3 Doors Down, plans to raise its suggested retail price for most new CDs to $13.98, an increase of $1, they said. The company will set wholesale prices on most new releases at $9.49, a 40-cent hike, and the price on the hottest new CDs will rise to $10.35, up 25 cents.

The (twisted?) logic behind this move is that the new pricing scheme will increase the retailer's margin from 29 percent to 32 percent. This increase in margin, Universal believes, will provide retailers with more incentive to bring their prices closer to the suggested retail price. But where is the incentive? Retailers who refused to lower their retail price gain nothing by doing so now. Retailers who bought into Universal's plan and aggressively lowered their retail prices will be hurt the most. To gain that additional margin they would have to increase retail CD prices, and some retailers may end up eating the wholesale price increase to avoid alienating customers who were accustomed to the lower prices.?

This move seems surprising since music sales appear to be rebounding. But if you look beyond Universal's spin, it all comes down to the bottom line. The original price cuts were a gamble that didn't pay off with increased sales and hurt company profits. Instead of being an effort to lower retail CD prices, it is likely this wholesale price increase is an attempt to reap additional profits from the recent upturn in music sales.